If merging two hospital systems seems complicated, unraveling a merger can be even more so. But ultimately, two West Virginia systems that joined forces in 1999 decided it would be less painful to work out their own separation agreement than leave it to the courts.
The amount of detail and legal jargon involved in the 20-page disaffiliation agreement signed late last month by Davis Health System, Elkins, W.Va., and West Virginia United Health System, Fairmont, provides some lessons for systems attempting to disentangle themselves. Agreeing to disagree may have been the easy part. Now, among other tasks, comes breaking one physician group into two, dealing with computer software licenses, making changes in accounting systems and removing Davis from some consulting engagements the two systems shared.
Late last month, Davis agreed to pay $995,000 to West Virginia United Health to call it quits. In 1999, Davis-composed of 115-bed Davis Memorial Hospital in Elkins and 72-bed Broaddus Hospital in Philippi, W.Va., as well as two clinics and 12 other healthcare organizations-had agreed to become a subsidiary of United, which includes 367-bed United Hospital Center in Clarksburg, W.Va., and 401-bed West Virginia University Hospitals in Morgantown. Both systems thought joining forces would give them greater clout with managed-care companies.
Two years later, with managed care virtually nonexistent in West Virginia, Davis took United to Kanawha County Circuit Court to dissolve the merger (May 7, p. 6). Tensions had heated up after United, which legally controlled Davis' board under the merger terms, conducted an outside audit that found allegedly improper business transactions by Davis' chief executive officer at the time, Robert "Buc" Hammer, who has since been fired. The audit also turned up questionable real estate transactions by the hospital that involved some of the system's board members.
United tried to remove four of the Davis board members, and Davis went to court to get an emergency injunction to prevent them from doing so, which the court granted. It was at that point the two sides decided to negotiate their severance rather than go to trial over it.
Ultimately, in the disaffiliation agreement, Davis agreed to abide by the conclusions of the outside audit and to seek restitution from Hammer, who allegedly used the hospital system's credit card for personal expenses and owes the system about $300,000. United also turned the audit over to the federal government; a federal fraud investigation into Davis is still under way. The four board members to whom United objected have resigned and the newly reconfigured board named a new CEO for the Davis system, but the bad blood between the two partners was irreconcilable.
"There were business transactions between the hospital and its board members that were not appropriately documented," said Bernie Westfall, United's president and CEO. "We questioned that, and when you question the way board members do business with the hospitals, that's the way disaffiliation talks start."
Westfall said the merger was working from his system's perspective. United recorded an $11.5 million profit on net operating revenue of $277 million for the seven months ended July 31, he said. Of that profit, $1.5 million was attributable to the Davis system, he said.
But Mason Corder, D.O., who has been on the Davis board for several years and became its interim chairman when Davis separated from United, said Davis never felt it was getting enough return on its investment in the affiliation. "The dues we paid seemed to be slowly creeping up and we just didn't see any benefit," he said.
Tracy Fath, a Davis spokeswoman, said unaudited figures for calendar 2000 show the Davis system lost $400,000 on $66.3 million in net revenue. Over two years, Davis paid $1 million in management fees to United.
In addition to the business costs of creating a new computer system for Davis, there is also a human cost to the disaffiliation. Of 26 physicians employed by the merged system, four will go back with Davis, but all 19 employees who worked for the larger physicians' group are also now Davis' responsibility. Fath said some if not all of those jobs could be eliminated.
Michael Peregrine, a healthcare lawyer with Gardner, Carton & Douglas in Chicago, said the West Virginia breakup shows the value of prenuptial agreements.
"That's often a hard sell," he said. "... (but) addressing the possibility up front can save the parties substantial sums by reducing the possibility for subsequent disagreement on the manner of breaking up."
